Monday Morning Market Insights: Last Week in Review with Rusty Vanneman, Vol. 9

Good morning, Happy Monday, and welcome to March!  

Last Week’s Market Movement

What a week last week. We saw another stretch of some incredible market movement, sparked by a sharp move higher in interest rates. 

Let’s consider some of the movement:

  • Though the 10-year Treasury yield closed the week at 1.44%, it did spike to an intra-day high of 1.61% last Thursday, hitting its highest levels since just over a year ago.  
    • For additional perspective, 10s bottomed last August 4 at 0.54%.  They started the year at 0.93%. It’s been a sharp move and it’s having an impact on the global markets. 
    • Despite this sharp rise in yields, it should be noted that the overall bond market is only down 2% for the year.  In fact, the Bloomberg Aggregate Bond Index is only down 2% since August 4.
  • Interest rates are moving in anticipation of the service economy re-opening and potential inflation. 
    • The yield curve (difference between long-term interest rates and short-term interest rates) hit its highest levels since 2017 (at least the difference between 10-year and 2-year rates).
    • The 10-year breakeven rate (difference between regular nominal treasury yields and inflation-linked bonds) hit its highest levels since at least 2018, as well.
  • Other markets are also responding to this notion of re-opening/reflation as the rotation appears to be continuing. For example, last week the NASDAQ had its worst day since last October.  Last week, Growth stocks were down just over 5% while Value stocks lost just less than 1%. 
  • For the year, the average stock in the overall market is up about 13%. The TV benchmarks, meanwhile, show the S&P 500 and NASDAQ are up 2% and 3% respectively. 

What can be said about such periods of volatility?  They usually suggest or confirm tide shifts in the market, where market narratives or leadership change.

Looking Ahead

As for a market outlook moving forward, it’s key to note that despite last week’s price weakness and volatility, the trend is still your friend and the bull market is still intact. 

And the economy’s prospects look good too. Things are getting better, as the COVID backdrop seems to continue improving, including more positive vaccine news (such as approval of J&J’s one-shot COVID vaccine). 

GDP estimates keep moving higher, with more brand name firms ratcheting up GDP estimates. I’m still betting we might see some 10%+ estimates in the month(s) ahead yet. To be fair, no big firms have estimates there yet, but they’re getting there as estimates have creeped up to 7-8% by some. Investing is about probabilities and possibilities, and portfolios should be built accordingly. It may not be highly probable we’ll get 10%+ GDP growth in 2021, but it’s possible. 

Some investors, however, are negative on the stock market’s prospects. One leading reason cited is that investor sentiment is too bullish.  While I’m a big fan of looking at and incorporating sentiment into investment decisions and counsel, I actually think that sentiment is currently not as issue.  

First, I like to look at the weekly AAII sentiment survey. Currently, it’s bullish, but nowhere near an extreme to be worried about.  

Secondly, the January update of investor sentiment from Yale’s International Center for Finance had a couple notable reads. The Yale’s Crash Confidence reading shows historical near-term concerns about a stock market crash from both individual and institutional investors. That’s definitely NOT bullish enthusiasm. Perhaps even more notable is that institutional investors are the most bearish they’ve been since at least 2001. Wow.

In summary, investment firm First Trust’s thoughts on the market and economy are worth considering: “…herd immunity by April/May is very possible… a $1.9 trillion stimulus bill, which along with opening the economy and money printing by the Fed is inflationary. The result: 10-year Treasury yields jumped, which reduces the value of future earnings, creating fear among investors. With the economy opening up, profits rising and 10-year yields unlikely to rise above 2%, the S&P 500 is still undervalued and on track to hit 4,200 by year-end.”

This coming week includes a fair amount of economic data, with the big one being non-farm payrolls on Friday. Arguably the economic number with the most impact, it’s expected to improve from last month. 

Words of Wisdom from Warren Buffett

Over the weekend, Warren Buffett released the annual Berkshire Hathaway shareholder letter with a wealth of valuable nuggets, as always. Here’s one: 

In 1958, Phil Fisher wrote a superb book on investing. In it, he analogized running a public company to managing a restaurant. If you are seeking diners, he said, you can attract a clientele and prosper featuring either hamburgers served with a Coke or a French cuisine accompanied by exotic wines. But you must not, Fisher warned, capriciously switch from one to the other: Your message to potential customers must be consistent with what they will find upon entering your premises. At Berkshire, we have been serving hamburgers and Coke for 56 years. We cherish the clientele this fare has attracted.”  

Here’s why I like this. As a veteran due diligence professional, who has literally interviewed thousands of managers spanning four different decades now, I believe that the most important quality to look for in an investment manager/fund is discipline and reliability. You have to know what the investment strategy is trying to accomplish. No surprises. 

This also means that styles of investing each have their days in the sun, and also their share of rainy days. Not every strategy can do well in every market environment. That’s why here at Orion Portfolio Solutions, we believe in diversifying portfolios by investing in different strategy mandates that will excel in different environments.   

Award Season Is Upon Us 

Did you watch the Golden Globes? My wife and I did some homework Saturday night and went to an actual cinema to watch “Nomadland” (a great, though unique, thoughtful movie, which did win Best Drama) as we were in a couple Golden Globe contests. With COVID, I think people did more homework than ever for the contest!

Have a great week! For more insights and commentary, visit our Financial Advisor Success Hub.

0698-OPS-03/01/2021

Disclosures:

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

The S&P 500 Index is an unmanaged index of 500-large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks.

You cannot invest directly in an index.

About Rusty Vanneman
Rusty Vanneman, CFA, CMT, serves as Chief Investment Strategist of Orion Portfolio Solutions. He has been with Orion since 2012, previously serving as President and Chief Investment Officer of CLS Investments. Prior to joining the Orion organization, Mr. Vanneman served as Chief Investment Officer and Managing Director for an RIA in the greater Boston area. His 11-year tenure at the RIA included a five-year span during which the firm was owned by E*TRADE Financial, where he also served as Senior Market Strategist for E*TRADE Capital. He also served as a Senior Analyst at Fidelity Management and Research in Boston. Mr. Vanneman received a Bachelor of Science degree in Management from Babson College, where he graduated with high distinction. He is a CFA charterholder and member of the CFA Institute. He also holds the Chartered Market Technician® (CMT) designation and is a member of the CMT Association.